When it comes to diversifying your investment portfolio, you probably already know the benefits of spreading your money across different investments. So what about putting your money into rental properties? Investing in rental properties is considered to be one of the best low risk investments as it offers a high return on investment if done correctly. In this blog, we will go through the advantages of owning income generating properties and what makes them the best low risk investments available.
The Different Real Estate Investment Strategies
There are several strategies that you can follow if you wish to invest in real estate. A long term investment strategy is where you buy and hold a rental property with the purpose of renting it out. This way you make money by collecting rent and building capital as the investment property appreciates in value. Another long term investment strategy is buying REIT shares where you receive yearly dividends.
A short term real estate investment strategy is when a real estate investor makes money from real estate in a short time, typically without even holding the property. The most common examples of a short term strategy are fixing and flipping properties and real estate wholesaling.
If you have been around in real estate investing for a while or even if you are just getting started, you might already know that flipping houses is considered a risky real estate investment strategy, especially for beginners. Wholesaling, while often recommended for beginners, is simply not the best way to make consistent cash flow and therefore is risky to depend on for steady income. Many will argue, however, that REITs are low risk. So let us see why rental properties are, in fact, the best low risk investments out of all the real estate investment strategies.
Rental Properties vs. REITs: The Risk Game
Real estate investment trusts are companies that actively own and operate real estate properties. As a real estate investor, you can buy REIT shares and make money in real estate without owning any property. However, buying an investment property has several advantages over investing in REITs. While investing in REITs can surely be profitable, the profitability of owning a rental property plus the advantages put this strategy on top.
One major advantage of investing in rental properties is the control. Having more control over your real estate investment allows you to freely decide on the methods used to manage and finance your investment property. Therefore, you can make decisions that could potentially lower the risk of a rental property.
When investing in a REIT, you will not have any control over the investment, unless you are of course one of the main shareholders of the company. Therefore, when it comes to real estate investment risk, rental properties will have less risk for real estate investors when compared to REITs. This is mainly due to the nature of the stock market and its more frequent fluctuations which are simply out of your control.
What Makes Rental Properties the Best Low Risk Investments?
The following reasons are the most important elements that make rental properties the best low risk investments in real estate:
1- Rental properties are tangible assets
Unlike investing in stocks or REITs, a rental property is an actual physical asset. This important feature is what makes rental properties the best low risk investments in real estate. That’s because it is almost impossible to lose the money you put in the property. The value of real estate often appreciates naturally, which acts as insurance in case you decide to sell the property or stop investing in real estate. Even when a housing market takes a hit and value drops, historically it always rises back up. And while you wait for this to happen, you still benefit from renting out your income producing asset in the short-term.
2- Demand for rental properties is on the rise
People will always need a place to live and that is the main motivation behind investing in rental properties. The best low risk investments in real estate are definitely those that are high in demand.
The market for rental properties is getting hotter across several housing markets in the US, and that is not limited to a single property type. Demand for apartment condos, single family homes, and multi family homes is on the rise as more people find it difficult to qualify for a mortgage or are not ready yet to buy their own homes. Just keep in mind during your investment property search that you need to look for markets where demand is on the rise and will be for years to come.
3- You can purchase rental properties using leverage
If you ask me what makes rental properties the best low risk investments, leverage would be my answer. Using someone else’s money such as banks or hard money lenders, you can leverage that money to build your wealth. Indeed, to make money in real estate you don’t need to have the full price of the investment property. With the rental income, your investment will pay for itself without risking your own money.
There are, of course, many risks associated with owning a rental property. Failing to find tenants is the worst thing that could happen as it can cause negative cash flow. Risk mitigation can be done by conducting real estate market and investment property analysis in order to choose the best rental property. Lucky for you, Mashvisor’s rental property calculator is an all-in-one tool that will not only provide important real estate metrics but will also help you decide which rental strategy is better to avoid vacancy costs and lower the investment risk.
Find Rental Properties Using Mashvisor
Signing up for our services allows you to use innovative tools that will help you find the best low risk investments in real estate. Our rental property calculator is the ultimate tool every real estate investor should have. From calculating return on investment indicators to helping you conduct an investment property analysis, it can do it all. Furthermore, the heat map analysis tool visualizes real estate information using a color code, allowing you to find and compare neighborhoods more quickly than traditional market analysis tools.
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